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Thursday, 9 February 2017

Little Room for Further Cuts in Lending Rates, Say Banks

“There is still scope for lending rates to come down since our policy rates have come down by 175 basis points since January 2015 while the weighted average lending rates have fallen by 80 to 85 basis points,” said Urjit Patel, RBI governor.
MUMBAI: RBI governor Urjit Patel has said that banks would be in a position to bring down lending rates further as full transmission of rate cuts have not yet taken place. However, banks say that given the hawkish stance of the central bank, there is little room to bring down rates.

Announcing the policy on Wednesday, RBI governor Urjit Patel said, “There is still scope for lending rates to come down since our policy rates have come down by 175 basis points since January 2015 while the weighted average lending rates have fallen by 80 to 85 basis points.” (100 bps = 1 percentage point). Another deputy governor Viral Acharya said that rates are coming down because banks are flush with deposits, thanks to demonetization. However, several bankers including Arundhati Bhattacharya, chairman, SBI, and Chanda Kochhar, MD & CEO, ICICI Bank, indicated that the scope for cuts was limited as banks have already brought down rates.

Announcing the decision to hold the reverse repo rate at 5.75%, the RBI said that the monetary policy committee is of the view that the persistence of inflation, excluding food and fuel, could set a floor on further downward movements in headline inflation and trigger second-order effects, although consumer price inflation was expected to be contained at 5% in FY17.

According to Bhattacharya, the governor himself has pointed out the solution to improve transmission of rates — resolution of non-performing assets, improving capital position of banks and making small savings rates market-driven. “Given the general environment of uncertainty both domestically and abroad, the RBI decision to maintain status quo was on expected lines,” said Bhattacharya.

Meanwhile, in the bond markets, the yield on the benchmark 10-year yield hardened to 6.75% from 6.43% on Tuesday. Since for most of the lenders, the 10-year gilt yield is one of the most important factors in determining their lending rates, bond dealers and analysts are not expecting any more drop in lending rates.

According to R P Marathe, MD & CEO, Bank of Maharashtra, the bank has been ensuring transmission of policy rates by passing on the maximum benefit to its customers. “We have reduced the marginal cost of lending rate (MCLR) by 20 basis points in February, resulted in a cumulative 90-basis-point cut in the last five months. So, banks are already doing their bit aided by easy liquidity in the system. The future course on MCLR will be purely governed by trends in underlying parameters like the marginal cost of funds, negative carry and cost of operations,” said Marathe.

Some bankers, however, felt that there was scope to reduce rates. “The shift in stance to neutral from accommodative with a status quo on policy rates should allow the RBI, going forward, flexibility to ease rates to push for stronger growth, amid government’s fiscal rectitude,” said Rana Kapoor, MD & CEO, Yes Bank.